Know About The Terms In Option Trading
Option trading demystified
You can enter the stock market with a minimum of investment and still get a bigger return on your investment if you go in for option trading. In option trading you pay a premium to give you the right to buy or sell some shares in the future. You can then buy or sell those shares within the time specified at the price decided. You are obliged to make the purchase or sale within the specified time or risk the forfeiture of the premium paid.
In option trading with stock for example, an option gives you the right to purchase or sell a fixed number of shares, determined by the option contract specification, within a specified time period and at a specified price. Hence, as an option buyer, you either execute that trade within the specified time period or forfeit the premium you paid, or else you sell the option itself for either a profit or loss depending on what has happened in the intervening period. Option trading expirations for a given option series are generally spaced one month apart, and the termination date is generally the third Saturday of the month or any other day decided by the Stock Exchanges. Once that date has expired, all rights of the trader cease and he cannot use the option to buy or sell that particular underlying stock.
Concepts
Option trading is quite dissimilar to stock trading. Before you decide to enter this field of trading options, you must understand the concepts and terminology, because the jargon alone can be very disconcerting to a new comer. The profit and loss concepts, as well as the various factors that contribute to the price of the option, are completely different to that of the underlying security. Option trading also provides you with vastly more opportunities to profit than does the simply purchase or sale of the underlying instrument. If you know what you are doing, it is actually safer to trade the options than the underlying stock.
You do not have to exercise your rights during the specified period, but your failure to do so will cause the premium you have paid for such future rights to be forfeited. The premium is charged to you so that you can lock in the agreed price for the time period that you have contracted to honor. So during these period, if you find that the price of the stock has appreciated, you are free at any time to make the balance payment and acquire the shares at the price agreed. On the other hand if the price has gone down and you do not feel that it is worthwhile honoring the option, you can take no action and allow your contract to lapse. You would however forfeit the premium you have paid. This may look like a loss, but would be much smaller than if you had bought the shares at the prevailing price before the start of the options contract.
The stock price may drop or just remain lower the exercise price, the buyer of call option cannot use at all, but can also sell the option and in that way exit the position at a loss or breakeven. Alternatively, he can hold onto it with the expectation that the market value of the option will rise, dependent upon factors such as the underlying stock price, volatility, time to expiry and more.
When you know what you are doing, there are also far more trading opportunities with relatively lower risk compared to merely buying or selling the underlying. Usually, the options of leverage can control a bulk amount of the original stock for relatively small capital expenditure compared with buying or selling the underlying tool. This makes options more attractive because there exists higher profits on investment than just trading the original instrument.
What do the words mean?
Blocks of 100 shares are considered for option trading.
The buying option of the underlying instrument at the strike price is referred to as a call option.
Put option: The option giving the right to sell the underlying instrument at the strike price
Strike price: This is the price of the stocks for agreed on when the option trading contract is made.
You are considered to be "in the money" if your strike price is less than the existing price at the time of the option and you put in a call option, or you put in a put option and the strike price is lower than the existing price.
Out of the money: When the strike price is above the existing price of the stock and you exercise a call option, and when the strike price is below the existing price of the stock and you exercise a put option. - 23212
You can enter the stock market with a minimum of investment and still get a bigger return on your investment if you go in for option trading. In option trading you pay a premium to give you the right to buy or sell some shares in the future. You can then buy or sell those shares within the time specified at the price decided. You are obliged to make the purchase or sale within the specified time or risk the forfeiture of the premium paid.
In option trading with stock for example, an option gives you the right to purchase or sell a fixed number of shares, determined by the option contract specification, within a specified time period and at a specified price. Hence, as an option buyer, you either execute that trade within the specified time period or forfeit the premium you paid, or else you sell the option itself for either a profit or loss depending on what has happened in the intervening period. Option trading expirations for a given option series are generally spaced one month apart, and the termination date is generally the third Saturday of the month or any other day decided by the Stock Exchanges. Once that date has expired, all rights of the trader cease and he cannot use the option to buy or sell that particular underlying stock.
Concepts
Option trading is quite dissimilar to stock trading. Before you decide to enter this field of trading options, you must understand the concepts and terminology, because the jargon alone can be very disconcerting to a new comer. The profit and loss concepts, as well as the various factors that contribute to the price of the option, are completely different to that of the underlying security. Option trading also provides you with vastly more opportunities to profit than does the simply purchase or sale of the underlying instrument. If you know what you are doing, it is actually safer to trade the options than the underlying stock.
You do not have to exercise your rights during the specified period, but your failure to do so will cause the premium you have paid for such future rights to be forfeited. The premium is charged to you so that you can lock in the agreed price for the time period that you have contracted to honor. So during these period, if you find that the price of the stock has appreciated, you are free at any time to make the balance payment and acquire the shares at the price agreed. On the other hand if the price has gone down and you do not feel that it is worthwhile honoring the option, you can take no action and allow your contract to lapse. You would however forfeit the premium you have paid. This may look like a loss, but would be much smaller than if you had bought the shares at the prevailing price before the start of the options contract.
The stock price may drop or just remain lower the exercise price, the buyer of call option cannot use at all, but can also sell the option and in that way exit the position at a loss or breakeven. Alternatively, he can hold onto it with the expectation that the market value of the option will rise, dependent upon factors such as the underlying stock price, volatility, time to expiry and more.
When you know what you are doing, there are also far more trading opportunities with relatively lower risk compared to merely buying or selling the underlying. Usually, the options of leverage can control a bulk amount of the original stock for relatively small capital expenditure compared with buying or selling the underlying tool. This makes options more attractive because there exists higher profits on investment than just trading the original instrument.
What do the words mean?
Blocks of 100 shares are considered for option trading.
The buying option of the underlying instrument at the strike price is referred to as a call option.
Put option: The option giving the right to sell the underlying instrument at the strike price
Strike price: This is the price of the stocks for agreed on when the option trading contract is made.
You are considered to be "in the money" if your strike price is less than the existing price at the time of the option and you put in a call option, or you put in a put option and the strike price is lower than the existing price.
Out of the money: When the strike price is above the existing price of the stock and you exercise a call option, and when the strike price is below the existing price of the stock and you exercise a put option. - 23212
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